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HMRC internal manual

VAT Partial Exemption Guidance

Guidance for specific trade sectors: land and property: practical issues for special methods

It is common accounting practice for land & property businesses to allocate costs to individual properties, groups of properties or parts of properties, as recorded in a business’s records/rent roll. The related input tax can vary between VAT on capital expenditure relating to a new development or a major refurbishment programme, through to day to day running costs including costs recovered from tenants by way of service charges/additional rent.

If the accounting system reflects the way costs are used in the business, it can be followed for partial exemption purposes. If not the different activities and business structures may need to be identified and specified so that residual input tax can be more reasonably allocated to reflect the use of the costs in the different activities and areas of the business.

Residual input tax can be analysed by type (e.g. maintenance costs), perhaps also grouped into identifiable generic sectors (e.g. property leasing activity) and/or distinct organisational splits (e.g. regional office), in order that it can be apportioned more fairly. For example, individual properties can be partial exemption sectors in their own right, so that any residual input tax incurred on a specific building is able to be apportioned in accordance with the use of that building in the event that it gives rise to both taxable and exempt supplies.

At a higher level, property leasing could be treated as a distinct part of a business and a specific partial exemption sector to deal with residual input tax incurred in respect of general managing agents’ fees, for example. Such input tax could then be apportioned in accordance with the use made of it in that particular business sector by reflecting the basis on which the agents fees are calculated, perhaps taking into account the number/value of taxable leases managed as a percentage of all leases managed.

Any input tax not attributed thus far must by definition be residual. Such input tax can be treated in a number of different ways but should still be apportioned It remains feasible that one single apportionment calculation may be appropriate; if such a calculation is not open to distortion and does not result in an unfair or unrepresentative result. Separate calculations might be more appropriate where, for example, a business has a management structure whereby some offices deal with specific issues, such as a local administration centre responsible for tenant relations. Other offices are truly group-wide in their activities, for example a head office.